When Asian markets swooned last week, India felt the full force of an icy blast blowing south across the Himalayas. As Beijing devalued the yuan, Mumbai’s stock market shivered, suffering its biggest one-day stock market slide, with the benchmark Sensex index falling by 1,624 points.
Policymakers were so rattled that by the middle of the week Raghuram Rajan, the Yoda-like Indian central bank governor and cheerleader-in-chief for the economy, was being wheeled out to soothe raw nerves and offer home-spun reassurance that he was not “in panic mode”.
On one level, the Asian contagion that spilt into the sub-continent last week was understandable. Globally, listed funds hold about $110 billion of Indian stocks, with about 64 per cent of that held in pooled emerging market funds.
If the turmoil in China intensifies, a rush for redemptions threatens to further pummel Indian shares and the nation’s currency, the rupee, reigniting inflationary pressures.
China’s currency devaluation is also likely to harm Indian exporters of goods such as cotton, textiles and food. Many compete directly with China and will now be less competitive. But India is still well-placed to weather the China crisis. And, curiously, some of its bigger neighbour’s problems could actually be good news for India.
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Above all, India stands to benefit greatly from lower commodities prices, which have tumbled sharply in recent months amid signs of cooling Chinese demand.
The plunging price of oil has big benefits for India, which relies on imports for about 75 per cent of its crude. India’s oil import bill is expected to fall by nearly a quarter this year to $88 billion — far below the $144 billion paid in 2013. That is having tangible benefits. As well as cutting the cost of fuel for consumers and businesses, Delhi’s foreign exchange reserves rose by 13 per cent over the past year. Since January last year , inflation has halved while the nation’s current account deficit has dropped by 93 per cent.
It’s not just oil. India is also a big importer of gold, copper, steel and coal — all of which have fallen in price sharply too.
And while, globally, a Chinese slowdown will act as a headwind for exporters of everything from Australian iron ore to French handbags and German BMWs, India’s economy is far less exposed than some others. Despite their geographic proximity, China accounted for only 5 per cent of India’s total exports last year. That compares with 29 per cent for Australia, 14 per cent for Thailand and 9 per cent for the United States.
China’s slowdown also offers India a big opportunity. After decades of being overshadowed by its turbo-charged neighbour, India stands in an enviable position.
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With 7.5 per cent GDP growth, India is poised to outstrip China this year as the world’s fastest-growing big economy, the IMF says.
That trend is likely to remain in place next year and possibly the year after — a record that Narendra Modi, the Indian prime minister, would be foolish to allow to go to waste.
As investors scout out opportunities for higher growth they will recall that more than half of India’s population of 1.2 billion is under the age of 25, which gives the country a demographic advantage over China.
Mr Modi should seize the moment. He should intensify his “Make in India” campaign to sell India as a destination for international investors while redoubling efforts to prune red tape and rationalise the nation’s tax system — two problems that still act as big stumbling blocks.
He will have his work cut out. Reforming India’s cumbersome bureaucracy and shambolic infrastructure is a Herculean task, but Mr Modi will never have a better opportunity to do it.
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Robin Pagnamenta is Energy Editor of The Times